1. What is Economic Profit?

Economic profit is the difference between a firm's total revenue and the sum of its explicit and implicit costs. Unlike accounting profit, it considers opportunity costs (implicit costs) of using resources.

2. How Does the Calculator Work?

The calculator uses the economic profit equation:

Where:

• Total Revenue — All income from sales of goods/services
• Explicit Costs — Direct, out-of-pocket payments (wages, rent, materials)
• Implicit Costs — Opportunity costs of using self-owned resources

Explanation: Economic profit shows whether resources could be more profitably deployed elsewhere. Positive economic profit indicates efficient resource use.

3. Importance of Economic Profit

Details: Economic profit helps businesses evaluate true profitability considering all costs, including foregone alternatives. It's crucial for long-term strategic decisions.

4. Using the Calculator

Tips: Enter all values in dollars. Include all revenue streams and account for both direct costs and opportunity costs (like owner's time or capital).

5. Frequently Asked Questions (FAQ)

Q1: How is economic profit different from accounting profit?
A: Accounting profit only subtracts explicit costs, while economic profit also subtracts implicit opportunity costs.

Q2: Can economic profit be negative?
A: Yes, negative economic profit suggests resources could be better used elsewhere.

Q3: What are common implicit costs?
A: Owner's time, invested capital returns, building space that could be rented.

Q4: Why is economic profit important for small businesses?
A: It reveals whether the business is truly more profitable than alternative uses of the owner's resources.

Q5: How often should economic profit be calculated?
A: For major decisions and at least annually to assess overall business viability.